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Edited Transcript of MNZS.L earnings conference call or presentation 5-Mar-13 9:00am GMT

Preliminary 2012 John Menzies PLC Earnings Presentation

London Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of John Menzies PLC earnings conference call or presentation Tuesday, March 5, 2013 at 9:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Paul Dollman

John Menzies plc - Group Finance Director

* Craig Smyth

John Menzies plc - MD of Menzies Aviation

* David McIntosh

John Menzies plc - MD of Menzies Distribution




Paul Dollman, John Menzies plc - Group Finance Director [1]


Right, so starting off quickly with the agenda, you've got -- apart from the people [Ian] has just introduced -- you have got my usual crew, myself and Craig and David. I will go through the group highlights and financial overview. Craig and David will then go through a bit more detail of the individual business results, and I will come back with a summary and outlook at the end.

So in terms of highlights, we believe we have done what we said we would do. We delivered another set of results in line with expectations. This is following our consistent strategy of looking for stability and distribution on growth out of aviation. We have continued our progressive dividend policy with a 5% increase in our dividend this year again.

In terms of what has happened during the year, there has been quite a lot of action during the year in both divisions. In Craig's division, we have taken some big actions to address a couple of structural issues within the cargo operations in aviation, which Craig will talk to. In David's business, we've done a fairly massive rationalization of branch-to-branch network, again which David will talk to.

It has also been a year of investment for us. We have invested quite a lot of money, not just in the restructuring, but also actually in buying stuff. We have done five acquisitions during the year, the biggest one of which was at a distribution, Orbital Marketing Services. Again, David will talk to that. It is the biggest thing they had done, pretty well ever, I think. But also at aviation we have had a very good organic year with lots of contract wins but also a couple of selective acquisitions along the way.

So in terms of the numbers, then, looking at segmental profit, the result for the year: aviation, GBP35.6 million, is 10% up on last year. Distribution, bang in line with last year at GBP28.8 million, which means that underlying operating profit of GBP63.1 million is 5% up on the previous year. In terms of the interest line, our external interest went down from GBP4.9 million to GBP3.8 million. That was mainly due to having lower average net debt levels during the year, but also lower average interest rate.

On the pension front, we -- as much publicized -- we went from a credit in 2011 to a charge in 2012. And under good old IAS 19 R, that all changes massively again next year, so it will change in 2013. So that means at the underlying PBT level, we were 4% up at GBP58.4 million. In terms of EPS, it was broadly neutral to the year before, mainly because of a slight increase in the tax rate, but also a slightly higher number of average number of shares in issue.

And finally, as I mentioned, the final dividend is up 5% to 17.85p. And the total dividend for the year, therefore, is 25.2p, which is a 5% increase on the year before.

Looking at the two divisions in a little bit more detail: at aviation, turnover, including JVs and associates, was up 3% to just under GBP700 million. On a constant currency basis, that would have been about 6% up. The profit, as I mentioned, is up 10%. Also we have finally hit the target we have been having for a couple of years now to get the operating margin above 5%. So 5.1% is quite an important milestone for Craig's business. And, again, if we were to look at it at a constant exchange rates, the profits were about 16% up. So the sort of underlying performance of the business is within our 10% to 15% target.

Looking at the profit bridge now. From last year's GBP32.2 million (sic - see slide 7, "GBP32.3 million"), up to this year's GBP35.6 million, the first columns are on a sort of pure like-for-like basis. So cargo was down slightly at GBP0.3 million. This was due to underlying like-for-like cargo volumes are down 5.6%. Ground handling, like-for-like, was up; and that was down to we had like-for-like growth there of 3.5%. Cargo forwarding, which is our AMI business, had another good healthy year, and a good increase in profits, up GBP0.9 million.

Business development -- which is actually a combination of both cargo and ground handling, so that is all the contract win activity in the current year, as well as the annualization from previous years -- gave us the additional GBP2.6 million. And the main negative was GBP1.9 million which is the FX headwinds, which were well documented, bringing the profits back to GBP35.6 million.

Looking at distribution, turnover was down 3% on the year. This was purely down to the reduction in volumes that was well documented across the industry. Profits held flat at GBP28.8 million, and that the margin also held at 2.2%.

In terms of the profit bridge here, this is a very, very familiar picture you've seen for many, many years now with the underlying declines in the core business is offset by a combination of new business and cost savings.

Within the core categories, newspapers did a little better than we thought, down only GBP1.3 million. Magazines a little bit worse at GBP4.1 million. Within that, the most difficult sector was the weeklies. And within that, it was the celebrity sector that was the one that gave us much of the problem. We had a slight uplift; less than we had expected, actually. The Olympics didn't do much for us. We got a little bit from the Euro championships. But the collectibles were only up net GBP0.2 million for us.

But David, yet again, had a very strong result in terms of cost savings, GBP4.9 million this year; a combination of branch rationalizations we have done this year, and also again the annualization of cost-saving measures we did the year before. And then we had a small uptick in new business, getting back to the same number as the year before.

In terms of debt, as I mentioned, we have done a fairly significant investment in both the restructuring of the two divisions as well as acquisitions. But the net debt overall still is comfortably below GBP100 million. We believe we have one more facility which is up for grabs again this year, which renewed to GBP50 million with a GBP55 million facility in January this year, which means all our facilities now are secure through to May of next year and beyond. Also our total debt to EBITDA is still below 1.5. Our interest cover is well above 15. So I think, generally speaking, the whole debt side of life for us is in pretty good shape.

We did have some exceptional costs, as I mentioned at the beginning. Within aviation, the cargo operations, we did a big restructuring of our UK cargo operations. And we also closed our shed cargo operation. And that has given rise to a P&L cost of about GBP10 million between those two. Other various rationalizations within aviation across the world came to about another just over GBP4 million. And David's shed restructure came down to GBP4.1 million, so a total of GBP18.4 million. The cash cost of that was about GBP10 million because most of the Chicago one is recognized the onerous lease which will spread out over the next about five years or so.

And with that, I will actually hand over to Craig.


Craig Smyth, John Menzies plc - MD of Menzies Aviation [2]


Okay. Right. So as Paul said, aviation delivered a good operating profit increase of GBP3.3 million in 2012. That is up 10% in absolute terms, and up 16% using constant currency, so we certainly achieved our 10% to 15% growth expectation. Also pleasing, as Paul said, was our margin, at 5%. That has been our target for about five years now, so we are there now. And finally having exhausted many options for our cargo sheds, as Paul said, we closed our regional sheds in the UK and are on target to close the Chicago lossmaking shed by the end of this month.

So running through the drivers of full-year performance, ground handling -- I call it our growth engine -- it grew as a result of aircraft turnarounds being up 3.5% like-for-like. And after contract wins, our absolute turns were up 9%. Cargo handling turns, they were down close to 6% like-for-like, reflecting tough market conditions, but flat overall with contract wins holding as steady.

Along with our organic growth success, we also made three acquisitions in the year, two in ground handling: one in the UK, and one in the Czech Republic, and one in cargo handling in Romania. And looking forward, our strategy really is unchanged. It really is about our reputation for market-leading safety and service that keeps our growth going. We do have a clear plan with solid analytical foundations to continue to grow in existing countries, and also get into some new countries where we are also making good new relationships all of the time.

So turning to our ground handling business in a bit more detail, underlying profit was up 5%, and margin maintained at 5.4%. We did absorb some airline failures, particularly Velvet Sky in South Africa; Air Australia in Australia; Kingfisher in the UK; and BMI, which I call a failure because BA had to come to the rescue. All of these cost us some bottom line, both in the year and going forward.

Nevertheless, you will see from the chart on the right-hand side up here, the underlying aircraft turnaround volumes were consistent during the year; and in absolute terms, up 9% after a good contract win season. Notable wins shown here were Flybe and British Airways, both in the UK and both excellent startups just before the Olympics.

Contract renewals, also a clear indication of our strength in ground handling, were good too, with probably a busier season than normal with 72 contracts renewed, securing almost GBP100 million of revenue for at least three years. And again some notable renewals were Alaska Airlines we've handled for many years in the US, 14 stations across the US and Mexico. Singapore Airlines, another quality legacy carrier had four stations in Australia and New Zealand.

Inevitably we had some yield reduction on these renewals but we will endeavor to offset this with productivity gains this year and going into the future. The bottom right chart you see there showing the absolute turns over the last five years was a 10% compound annual growth rate which is again why I always call ground handling our growth engine.

Looking now at cargo handling, this next slide: underlying profit was up 18%, and margin improved by 1%. Again you will see in the chart on the right that underlying volumes have been much weaker than ground handling, and indeed have been negative for almost 2 years since the recovery in 2010. This is entirely driven by adverse GDP and general economic conditions which impact cargo more than passengers.

However, some good contract wins and renewals with notable customers, flagged on this slide here, insured we delivered profits ahead of last year.

So I've talked a lot about -- in the past about lossmaking sheds and the ugly sisters. During the year we closed Manchester, Birmingham, East Midlands, Glasgow, with Aberdeen to come. And we have also announced the closure of the lossmaking Chicago shed which we will be out of by the end of this month. And that just leaves Heathrow as the only material lossmaking cargo shed which we are currently integrating with our strong ground handling business at Heathrow.

And before I leave cargo, if you look at the bottom right of the slide: less material numbers, I know. But you will see AMI which is our founding cargo forwarding business, and it is somewhat on a roll at the moment with profitability more than doubling over the last three years. AMI, essentially operating as a belly space broker, does continue to give us an exposure to the cargo market, but without the often significant investment in fixed cost and operational gearing.

We do have a formidable track record of organic growth over the last 10 years. And this is testament to both our strong operating model as well as how we are focused on key account management towards the more attractive, financially strong, and growing airlines. This chart shows the number of station contracts and the development of the business relationships over the last five years. The light blue that you see just in the top of each bar chart shows the contracts we have won since 2009. Of particular note there certainly mining the relationships still with EasyJet, British Airways, VivaAerobus, Turkish, and Qatar Airways. All these airlines I have just spoken about, and in this slide, do value the operational excellence and attention to detail we give them, day in and day out.

So in terms of looking forward, as I said in the opening, we do have a plan for continued growth. First of all, we still want to grow in our existing station portfolio where we still see scope to increase our market share through winning more business and increasing profitability through economies of scale.

Secondly, for new stations and markets, we have gained a lot of experience over the last 10 years of what works well and what doesn't work so well. And we have developed this into what we call our own strategic analysis model which will help us follow a more rifle shot approach to growth going forward.

Just some detail for the moment on the right-hand side. So the regression analysis we undertook during the year looked at many macro and micro economic factors, as well as common characteristics of our most successful stations. Essentially, for countries, GDP growth is the most important factor for success.

And when it comes to stations, it's all about having a sensible number of handlers in the market and an available market of a good size with attractive, financially strong, and growing on what we call anchor customers. Anchor customers are customers that are going to give us 12 to 15 turnarounds a day, and we can be profitable from essentially day one when we start handling them.

In terms of implementing this growth strategy, we will continue to do this organically as well as through selective acquisitions. If you take Flight Support, it was our biggest acquisition this year. It is the last independent handler in the UK. And what it has done -- it has grown our market share in Manchester, given us an anchor customer in the form of Flybe, and a handful of new stations in the UK. It has been highly synergistic and it has helped consolidate the UK market.

Lastly, just opportunistic, the lowest [broom] for the odd opportunistic growth as we update our model with new information and also where we see attractive returns.

Just before we were finishing the plan -- this largely is the plan going forward. It shows the next 50 attractive stations in both our existing countries and new countries, and it forms the basis of our business development plan over the next three to five years. The detail is not that important. But the little charts across each region show range of potential anchor customers and sizable, attractive markets where we think we can get some good market shares.

We do believe that our rifle shot approach -- built, quite frankly speaking, on a strong track record and understanding of our market -- will maximize our chances of success as we continue to target an overall growth range of 10% to 15%.

So just before I finish and hand over to David, it has been a testing year against the backdrop of challenging economic conditions, but again that is not new. We have faced that for the last four years, but still managed to grow our profits within this range of 10% to 15%. Much of that has been down to winning business successfully, organically, because our airline customers do value what we consistently do for them. It is also down to taking actions where we have got lossmaking businesses, particularly in the larger cargo markets; and we believe we have made the business, by some of these actions, more resilient going forward.

The strategy going forward is built on the strong foundations. And we are going to try and repeat the successful formula of the past, but with more confidence from this rifle shot approach. And again, we are going to get ourselves into new markets, be that by organic entry or by making selective acquisitions.

So just to finish out, I think there are still good opportunities for continued growth in what is still a highly fragmented market and commonly accepted as a growth market.


David McIntosh, John Menzies plc - MD of Menzies Distribution [3]


Thank you, Craig. Good morning, everyone. So distribution -- 2012 saw our division deliver stability amidst difficult market conditions using the formula we have refined over the last three years: operational efficiency allied to business innovation in order to support diversification.

This formula has allowed us to deliver steady profit growth of GBP28.8 million despite sustained decline in our core markets. Volume declines have been within our expected range, except for weekly magazines, particularly the women's and celebrity market. Newspapers have fared better, though, mainly driven by newspaper cover price growth.

Looking forward, we have secured contract incentives with two key publishers; and of note, News International was one of them. We have won substantial regional business in Scotland, and made our largest acquisition yet, all of which underpins solid business prospects in 2013.

So turning to sales, a chart you've seen many times before. Overall sales projections for the period were broadly borne out, confirming the conditions within the market remain tough. And as you can see from the chart, the blue bars are the key ones for us because that's sales value. The blue line is underlying volumes.

For newspapers, it was slightly better than we expected mainly due to cover price growth, and again we have seen cover price growth into the current year as well. And I turned to magazines: they were slightly worse, largely down to a slump in the weekly/celebrity sector which has been worsening -- it's been a worsening trend for a few years now, and particularly into 2013, the early part.

However, today is quite a key day for us because since the first time since 2006, we have actually got a major launch in the magazine market. It is a TV magazine weekly called [TV Pick]. It is coming from the northern and shelf stable. There is 1.4 million copies going into the market this morning. And it's backed with a huge amount of promotional activity. So it is clearly too early for us; but it is a major, major move for us since 2006.

So the underlying parts of the business in terms of a redesign: this slide highlights the success of the formula I described earlier. By focusing on driving cost out of our business through both tight financial control and an innovative approach to redesigning our processes, so we have delivered GBP10.8 million cost savings over the last three years. The substantial restructure of our branch network, as Paul highlighted, and strategic benefits of our SAP implementation have been key factors in this performance.

The next three years will see greater focus on smarter working with results delivered from our newly created continuous improvement initiative. By training a wide range of operates in the business of Lean Six Sigma methodology and placing them under the guidance of an expert core team, we will remodel our basic operations, ensuring that working practices are optimized. This process has been underpinned and accredited by the Knowledge Transfer Partnership and will be widened later in the year to include publisher interfaces.

So based on our track record and our new initiatives, we are confident of delivering a further savings of GBP10 million over the next three years.

So to the new part of the business. In 2012 we bought Orbital Marketing Services Group, the largest acquisition in our division's history, for GBP5.7 million up front, and a further GBP78 million based on performance down the line. Orbital was chosen because it brought us just the right mix of synergy potential and future opportunity expanding to grow -- into growing our new markets. We now have a project team of senior managers working closely with our Orbital counterparts identifying and delivering costs and revenue synergies and smoothing integration of the business into the wider division.

Our expectation is for Orbital to deliver upwards of GBP1 million in synergies over the next three years, and that's in addition to the underlying GBP3 million of EBIT they should be delivering. In addition to that, it should also allow us the opportunity to [explore] become the truly national logistics operation, as you can see from the map.

So finally from me, our vision for the future is simple. We will continue to manage our traditional declining market in the most robust and cost-effective way possible. We will quickly capture substantial synergies from new Orbital business and we will leverage our expanded network to secure new revenue streams. All this will be underpinned by our innovation-led approach to doing business, delivering cost savings, and maximizing the value from SAP. We believe that there are always opportunities to improve within the division, and a wealth of opportunities around to some new markets, particularly following the Orbital acquisition. We look forward to 2013 with some confidence. So enough from me, and for the last time.


Paul Dollman, John Menzies plc - Group Finance Director [4]


One night only. Thank you, David. So to finish off, then. Apologies; I have used this chart before. But it does just remind you of the resilience that this group actually has across the last 10 years. This is our 10-year EBITDA performance. Remember EBITDA is the engine of cash generation which is all-important, we believe. And if you look at distribution there, I mean it's an incredibly steady performance over a very, very long protracted period. And that EBITDA and cash generation has helped fund the consistent -- fairly consistent growth we have seen in the aviation business.

So as a group, the compound growth for the whole group has been 9% for the year. Aviation, on its own, it's in excess of 17%. So I think we do have, through various economic cycles, a fairly good resilient performance and track record.

In terms of the strategy, it has unashamedly not changed within aviation, it's continuing to deliver profit growth. That is a combination of extending our reach in existing markets; starting to look at new markets with the rifle shot, as Craig has mentioned; and with selective acquisitions, as and where appropriate. And there is, out there, a large available market. We only have about less than 3% market share.

Within distribution, it's all about maintaining that performance of steady EBITDA generation. We've secured a number of key contracts, as David has mentioned. There is more to follow. And within new business, they have had a big step change this year with the Orbital acquisition. And for David and his team, it is about delivering those synergies coming through for next year, and giving us some more growth coming out of that part of this business.

So in terms of the outlook, we think it's a good set of results. There has been a lot of investment this year, both in terms of acquisitions and restructuring the businesses. As the guys have mentioned, it's difficult economic conditions. But you know what? That is not new at all. We have had difficult economic conditions for a number of years now. We as a team believe when you look at our track record, we are in a position where we can continue to deliver growth; and then, hopefully, my Chairman's favorite thing, which is shareholder value as well. And that's it for me. Thank you.